Tax Consequences of Employer Provided Abortion Travel Benefits (1)

Tax Consequences of Employer-Provided Abortion Travel
Benefits
By Jim Chapman of Thomson Reuters – 21Jul2022
With the release of the Supreme Court’s opinion in Dobbs vs. Jackson Women’s Health
Organization, the right to abortion under the US Constitution has been abolished, and it
appears states will, at least for the time being, have a relatively free hand in regulating
abortion. Expect some flux, but it appears that many states will (or already do) strictly
limit the practice, while others will allow it. Some states will permit abortion, subject to
restrictions.
In response to the decision, companies are adopting policies under which they will
pay for employees to travel out of state (if necessary) to obtain abortions. Policies
vary from company to company, but typically benefits provided include paying for the
procedure itself, as well as travel expenses (transportation, lodging, and meal costs).
This article will analyze the tax consequences to both businesses and employees of
providing these benefits.
Employer-provided benefits for medical care
The employer’s payment of health and accident insurance premiums for employees and
their families, or the employer’s direct payment or reimbursement of actual expenses
under a plan, is deductible as an ordinary and necessary business expense. Health
benefits are excludable from an employee’s income under Code Sec. 105 if they are
paid, directly or indirectly, to the taxpayer as reimbursements for expenses for medical
care for the taxpayer, or the taxpayer’s spouse or dependents. The employer-provided
premiums themselves are also excludable from an employee’s income.
For purposes of Code Sec. 105, “medical care” is defined by reference to Code Sec.
213(d), which states that medical care includes amounts paid for, among other things,
“the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose
of affecting any structure or function of the body,” and for “transportation primarily to and
essential to medical care referred to in [the foregoing]”
Even if amounts paid on an employee’s behalf do not meet the definition of medical
care, such that they are included in employee income, they may still be deductible
compensation expense to the employer, like other employee expenses paid by the
employer that are not excludable fringe benefits. However, under Code Sec. 162(c)(2),
an illegal payment under a law of the U.S. or under any law of a state, is nondeductible,
but only if that state law is generally enforced and subjects the payor to a criminal
penalty or the loss of license or privilege to engage in a trade or business.
Payments that aren’t themselves illegal but are connected to or in furtherance of an
illegal activity are deductible as long as they’re ordinary and necessary business
expenses and their deductibility isn’t otherwise specifically forbidden. Therefore,

whether payments for an illegal abortion are deductible depends on whether state law
outlaws paying for the abortion, as distinct from simply outlawing the abortion itself. The
payments should be an ordinary and necessary business expense if otherwise treated
as compensation income or a fringe benefit.
Definition of medical care includes legal abortion
Under Rev Rul 73-201, abortion is medical care for purposes of Code Sec. 213(d) (and
so also Code Sec. 105) because it is for the purpose of affecting a structure or function
of the body. Thus, abortion expenses are medical expenses (and so are deductible by
an employer but excluded from income by the employee).
Rev Rul 73-201 concerned an abortion operation that was “not illegal under state law.”
Presumably, expenses for services involving abortifacient drugs (which were developed
after 1973) would also be considered medical care.
Post-Dobbs, providing abortion services is illegal in many cases in some states and
soon will be illegal in others. In still other states, providing abortion services will be
generally legal. Helping someone obtain an abortion may also be subject to criminal or
civil penalties. Whether ending one’s own pregnancy will be subject to criminal or civil
penalties is not clear yet in most states. The definition of medical care in the Treasury
Regs under Code Sec. 213 states “amounts expended for illegal operations or
treatments are not deductible,” so expenses for abortions provided contrary to state
law may need to be included in employee income. Furthermore, to the extent that the
payments are for illegal abortion services, the deduction could be denied to the
employer. IRS has, as of press time, released no guidance on application of the rule in
Rev Rul 73-201 post-Dobbs.
Current law
Expenses for legal abortions should continue to be medical care under Code Sec.
231(d), and so should continue to be excludible under Code Sec. 105. For abortion
expenses that are deductible by employers under Code Sec. 162 and excludible from
income by employees under Code Sec. 105, the following rules should apply.
Transportation costs. Transportation to obtain a legal abortion should be deductible.
The medical mileage rate is 18¢ a mile for expenses paid or incurred from Jan. 1, 2022,
through June 30, 2022, and 22¢ a mile for expenses for July 1, 2022, through
December 31, 2022. The rate is adjusted for inflation.
Lodging and meals. Lodging away from home generally does not give rise to
deductible medical expenses. However, the cost of such lodging may qualify as a
deductible medical expense if all of the following requirements apply:
• The lodging is primarily for, and essential to, medical care.

• The medical care is provided by a physician in a licensed hospital (or medical
care facility related to, or the equivalent of, a licensed hospital).
• The lodging is not lavish or extravagant under the circumstances.
• There is no significant element of personal pleasure, recreation, or vacation in
the travel away from home.
The amount excludible for lodging under these rules may not exceed $50 for each night
for each individual. No exclusion is allowed under these rules for meal expenses.
The above rules apply to lodging incurred while at an away-from-home location to
receive medical care. What about meal and lodging expenses incurred when a
taxpayer is travelling from home to a state where the abortion procedure is to be
performed? The authorities are split. The Tax Court and the Sixth Circuit would
consider such costs medical expenses (which would be excludible by the employee),
but the IRS has taken the position (in Private Letter Ruling 8336016) that they should
be denied.
Reimbursements exceeding the above limits. Employers may provide
reimbursements above the above amounts. Such reimbursements would be deductible
compensation expenses to the employer and would be included in the employee’s
income for tax purposes. Employers may wish to “true up” the reimbursement amounts
to offset any tax consequences to the employee.
Substantiation. Because this is medical travel (rather than business travel), the normal
substantiation rules apply, rather than the heightened substantiation rules applicable to
business travel. If the taxpayer drives (or is driven) to obtain the abortion, where the trip
originated and what vehicle is used would have to be substantiated for tax purposes,
and the taxpayer should normally keep a mileage log. However, consider whether the
taxpayer’s (employer’s or employee’s) activities are illegal under state law. They should
not create evidence that would incriminate them.
Future Developments
In at least some states where abortion is illegal or will be outlawed, legislation is being
considered that would ban travelling (or aiding travel) out of state to obtain an
abortion. At press time, it is unclear whether these laws would be upheld, or whether
they would be struck down under the dormant commerce clause of the U.S.
Constitution, and the IRS has yet to opine on their tax consequences. Even if the
abortion is legal where performed, how would breaking the laws of the taxpayer’s home
state to obtain the abortion affect the deductibility of the expenses? We will continue to
monitor this issue.
Another wrinkle: Republican lawmakers have introduced the Abortion is Not Health
Care Act of 2021 (S. 124/H.R. 380), and introduced House and Senate versions of
similar bills in the last Congress. As currently written, the bills would provide that
abortion expenses would not be taken into account for purposes of the Code Sec. 213

medical expense deduction (with the Senate bill containing exceptions for rape, incest,
or the life of the mother). However, they would not change the definition of medical
expenses in Code Sec. 213(d), which governs whether payments for medical expenses
are excluded under Code Sec. 105. Thus, it could be argued that while the bills would
deny the Code Sec. 213 medical expense deduction, they would leave the Code Sec.
105 exclusion intact. However, they could be amended to close this loophole.
These bills are unlikely to pass in the current, Democratic-controlled Congress, and
would likely be vetoed by President Biden if they did pass. However, they are likely to
be reintroduced in subsequent Congresses. Whether they ultimately become law
depends on the outcomes of the 2022 midterm and 2024 presidential and congressional
elections.